Alliance Fiber Optic – Strong Potential with Limited Downside

Alliance Fiber Optic – Strong Potential with Limited Downside

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As the iPhone 5 makes its way into consumer’s pockets this week, telecommunication companies such as AT&T (T) and Verizon (VZ) are expected to see a surge in their network for 4G LTE usage. This trend of an increasing use of data in telecom and data center networks has led to many of the network providers spending cash to upgrade their systems. One company that provides such equipment to feed consumers’ insatiable quench for data is Alliance Fiber Optics Products (AFOP).

Founded in 1995, the California-based company designs, manufactures and markets a range of fiber optic components with around US$6 million in operating earnings last fiscal year and a market capitalization of US$82 million. The company operates in two segments that both serves the same end market. First, it makes interconnect equipment that connects fiber optic cables to one another. This particular product makes up around 65 percent of its revenue. Second, it manufactures passive optical components that act on incoming light waves to split them or change their direction.

Since the first quarter of 2007, it has had positive earnings every year even during the financial crisis. The chief executive of the company owns approximately 10 percent of total outstanding shares and shareholders can rest assure that management’s interest aligns with their own.

Furthermore, the company generates a tremendous amount of cash flow from operating a very simple business. With US$175 million in cash and net debt of negative US$51 million – meaning it has more liquid cash than it has debt, investors buying into Alliance Fiber Optic can expect an investment that has the potential to take advantage of the trend in spending on network upgrades while at the same time possessing limited downside risk.

 

 

Written by SiHien Goh

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